Who can you trust for a mortgage referral?

Q. I don't want to price shop for a mortgage, because I don't feel competent enough and don't want to take the time to educate myself on how to do it. I want to go to a lender who I have been told, by someone I trust, is competent and will treat me fairly. So who can I trust for such a referral? Are friends who have recently gone through the process my best bet?"

A. No, consumers are generally a poor source of referral information. While referrals from recent borrowers do have the advantage of being disinterested, as compared to referrals from professionals such as real estate agents, borrowers are not well positioned to interpret their own experience accurately.

For one thing, borrower ratings are based on a single experience covering a complicated process extending over several weeks. That single exposure might or might not be typical or representative. As a point of comparison, a consumer providing a referral to a restaurant will usually base it on multiple visits to the restaurant, which might also have included guests who provided additional information.

In addition, few mortgage borrowers are well equipped to interpret that experience accurately. Again, the comparison with a restaurant referral is instructive. Where consumers typically know a lot about food preparation, few mortgage borrowers know much about mortgages when they begin the process. This makes their interpretations of what transpires vulnerable to misperceptions.

One important example is how consumers interpret their loan processing experience. Difficult cases, where the loan officer has to struggle to get the borrower approved, require more time and more documents from the borrower, which often frustrates the borrower and results in a poor evaluation. The easy cases, which require minimal effort by the loan officer, are the ones most likely to get a favorable referral.

Another example is how borrowers interpret rejection. Property value declines following the financial crisis have increased rejections of refinance applications because of insufficient equity in the property. Borrowers who pay for an appraisal only to have their application rejected are unlikely to have kind words for the lender who rejected them. In times past, messengers bearing bad news were sometimes hanged.

Similarly, lenders take the rap when they have to enforce ridiculous rules issued as knee-jerk responses to the financial crisis. One such rule that frustrates many mortgage applicants requires full income documentation by those self-employed, regardless of their credit score or their equity in the property. Some of these frustrated borrowers have complained about the stupidity of lenders to me.

In addition, borrowers often misinterpret their experience in locking the mortgage price. In most cases, the price quoted to a borrower cannot be locked for several days, during which the market will almost always change. (Prices are reset every day, and sometimes during the day.) If the price rises during that period, the lender will come back to the applicant with the bad news, and ask if the applicant wants to lock the higher price. Regardless of whether they go forward or not, the applicant will usually be displeased because the price requested was not received; the borrower might even allege that the lender pulled a "bait and switch".

If, in contrast, the market price falls prior to the lock and the lender offers to lock the price that was quoted earlier, the applicant will usually be pleased because the price they received was the price they expected. Yet the reality is that the lender in the first case played it straight, while the lender in the second case cheated the borrower by not passing through the drop in market price.

It was the lack of reliable information on the quality of mortgage loan providers that induced me some years ago to think about certification as an alternative approach. Certification means setting out enforceable modes of conduct for a particular type of loan provider, and making the list of those who qualify readily available to consumers. I developed Upfront Mortgage Brokers in 2000, Upfront Mortgage Lenders in 2002, and Certified Network Lenders in 2010.

Conspicuously missing from this group, however, are commissioned loan officers (LOs) employed by lenders, who originate more loans than any other group. It wasn't until recently that I figured out how certification standards could be developed and applied to this group. In the next month or so, I will be announcing a program of Certified Loan Officers.

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